Why Interest Rate Hikes Will Continue to Be On the Horizon

Investors looking for an indication of where interest rates are headed may be thrown off by recent comments made by President Trump criticizing said interest rate hikes.

The idea that monetary policy is affected by political discourse is one which holds some truth, but ultimately the decision with respect to the direction of interest rates lies in the hands of the Federal Reserve in the U.S., and the Bank of Canada north of the border.

Those hopeful that interest rates increases are put on hold, or at least initiated at a slower pace, are unlikely to see such actions take place for a few key reasons.

Economic expansion is now happening at a much faster pace than in previous years, as companies put profits from corporate tax cuts to work. The labor market remains tight in North America, and borrowing and spending trends remain robust.

On top of all this, key political figures overseeing monetary policy, including Treasury Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell have indicated that as the economy strengthens, interest rate increases are needed to keep inflation at bay, a policy stance which indicates interest rate hikes are all but certain in the near to medium term.

Investors at this point in time ought to consider re-balancing portfolios to align with interest rate hikes. I would also recommend increasing the percentage of defensive names in the near-term, as we approach the end of an incredible cycle.